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New Regulations Are Expected Soon

SAN DIEGO, Calif. - The Securities and Exchange Commission in November will adopt corporate governance regulations to strengthen the role of independent directors, an SEC official told attendees of the Investment Company Institute's tax and accounting conference here last week. The SEC had initially said it would issue new regulations in the summer.

In addition, the SEC will issue a Dear CFO letter to fund companies this fall providing new guidance on a broad range of accounting issues ranging from the allocation of shares of initial public offerings and the information that must be included in fee tables to how expenses are determined, said Barry Miller, associate director of the division of investment management of the SEC.

Also last week, the American Institute of Certified Public Accountants voted 13 to one to approve a new audit guide. The Institute will present it by October to the Financial Accounting Standards Board for its approval, said Alan Latshaw, chairman of the institute's investment companies committee and a partner with Arthur Andersen LLP of New York. Latshaw's committee plans to meet with FASB in December and expects the new audit guide to become effective by the first quarter of 2000, Latshaw told conference attendees.

As expected, the new audit guide will require funds to amortize premiums and credit discounts of bonds in their dividends. (MFMN, 8/9/99) It will also allow fund companies to include on their balance sheets net increases or losses in revenue due to bailouts of affiliates, Latshaw said. But, FASB still has to determine whether to permit bailouts as capital contributions, he said.

The SEC's corporate governance regulations are likely to require firms to increase the number of independent directors they have on their fund boards and to provide more information about the directors, said Miller of the SEC. The commission is also considering requiring directors to be at least partially compensated with fund shares to strengthen their loyalty to funds, Miller said. In addition, the SEC may require that insurance coverage for directors and advisers be separate, he said.

The SEC may also require funds to create audit committees consisting of independent directors and supply the committees with such information as how 12b-1 fees are used, Miller said.

In its letter to CFOs, the SEC plans to tell fund companies they must make it clear to investors when fee arrangements change, Miller said.

"Many waiver/reimbursement arrangements only hold for one year and [fund companies] have made this misleading to investors," Miller said. Therefore, the SEC may ask fund companies to provide investors with fee tables for three-, five- and, if necessary, ten-year periods, he said.

In addition, the SEC's Dear CFO letter may urge firms to include redemption fees in their fee tables, Miller said.

Furthermore, the letter may suggest that mutual fund companies include narratives along with their fee tables, he said. Such narratives should tell investors, in plain English, what the tables do and do not include, he said.

"We also have some problems with how people calculate expenses in relation to net assets," Miller said. "Many are including offsetting numbers. We are going to be looking carefully at whether these calculations reflect the true amount of expenses."

In addition, the SEC's Dear CFO letter will warn firms against using homemade or hybrid indexes to compare performance of their funds to these so-called benchmarks, Miller said. The SEC would prefer to see firms use standard indexes, accepted industry-wide, or to only use homemade or hybrid indexes in addition to those accepted industry-wide, Miller said.

The SEC will also be taking a closer look at the use of, for marketing purposes, performance figures for established funds that are similar to new funds with limited or no track records, Miller said.

The SEC is further concerned about the use of seed money in start-up funds and would like such money to remain in a new fund "as a bona fide investment attempt," Miller said.

The SEC will also be looking at the allocations of IPO's among funds to insure that they are fair, Miller said.